Former MPC man calls for Libor to be replaced

A former member of the Bank of England's Monetary Policy Committee has called for the replacement of the London interbank offered rate, describing it as "fundamentally flawed".

Willem Buiter said Libor - the benchmark for $360,000bn (£205,000bn) of financial products traded around the globe - had been discredited as a measure of the cost of credit.

"Libor is not the price of anything," Mr Buiter said in an interview on Bloomberg television. "It is the rate at which banks don't lend to each other. It is fundamentally flawed."

He said the British Bankers' Association, which oversees Libor, should establish a new benchmark based on the overnight indexed-swap, or OIS, rate - a measure of what traders expect the average central bank rate to be.

Amid the credit crisis, serious questions have been raised over the suitability of Libor. In March, the Bank for International Settlements said some lenders may have understated borrowing costs to hide the true extent of their funding difficulties.